Fed Saw Manageable Risks of New Bond Buying, Minutes Show

Oct. 4 (Bloomberg) -- Federal Reserve policy makers said
they could change the size of the central bank’s monthly asset
purchases to reduce the risks associated with the program, such
as disrupting financial markets and spurring inflation.

“Most participants thought these risks could be managed
since the committee could make adjustments to its purchases, as
needed, in response to economic developments or to changes in
its assessment of their efficacy and costs,” according to the
record of the Federal Open Market Committee’s Sept. 12-13
gathering released today in Washington.

Chairman Ben S. Bernanke and his policy making colleagues
announced the Fed will buy $40 billion of mortgage bonds every
month to spur growth and reduce unemployment. A Labor Department
tomorrow will probably show that the jobless rate rose last
month to 8.2 percent from 8.1 percent, according to the median
estimate in a Bloomberg Survey of economists.

The minutes contain a detailed discussion of the costs and
benefits of bond buying, with a few FOMC participants expressing
“skepticism” the program could help, and several saying the
purchases may “complicate the committee’s efforts to withdraw
monetary policy accommodation when it eventually became
appropriate to do so.”

Stocks, Bonds

The Standard & Poor’s 500 Index maintained gains after the
release of the minutes, rising 0.7 percent to 1,461.40 today in
New York. Yields on the benchmark 10-year Treasury note remained
higher, rising 0.06 percentage point to 1.67 percent.

Many participants said “specifying numerical thresholds”
for unemployment and inflation would be a better way to give
forward guidance about how long they will keep the main interest
rate near zero, according to the minutes. Some officials said
giving thresholds may be “too simple to fully capture the
complexities of the economy and the policy process or could be
incorrectly interpreted as triggers prompting an automatic
policy response,” the minutes show.

“It confirms the sense that the committee continues to
move toward numerical guidelines and thresholds for rate
hikes,” said Michael Feroli, chief U.S. economist at JPMorgan
Chase & Co. in New York and a former researcher for the Fed
Board in Washington. “That’s what really stuck out here, that
it’s a preference of most on the committee and it’s just a
matter of working out the details.”

‘Communications Challenges’

Most participants agreed that numerical thresholds could
give “more clarity about the conditionality” of guidance, and
more work is needed to address the “communications
challenges,” according to the minutes.

Policy makers discussed whether to purchase mortgage-backed
securities or Treasury debt, with some saying that “all else
being equal, MBS purchases could be preferable because they
would more directly support the housing sector, which remains
weak but has shown some signs of improvement.”

The FOMC in the September statement also extended its
guidance for how long its target interest rate will remain near
zero. The Fed lowered the rate to a range of zero to 0.25
percent in December and said it’s likely to remain there “at
least through mid-2015.”

The Fed didn’t set a total amount or duration for its third
round of quantitative easing while saying in their statement
that “a highly accommodative stance of monetary policy will
remain appropriate for a considerable time after the economic
recovery strengthens.”

Mid-2015

Bernanke said in an Oct. 1 speech in Indianapolis that
forecasting the main interest rate will remain near zero until
mid-2015 “doesn’t mean that we expect the economy to be weak
through” that date.

The minutes reiterated that theme, saying central bankers
wanted to clarify that holding interest rates low “did not
reflect an expectation that the economy would remain weak, but
rather reflected the committee’s intention to support a stronger
economic recovery.”

The minutes said policy makers conducted an experiment on
building a “consensus forecast,” and participants agreed to
discuss the results at their next meeting on Oct. 23-24.

All of the Fed’s 12 regional presidents and seven
Washington-based governors are participants in meetings of the
FOMC. The minutes do not identify participants by name.

The FOMC members are the 12 participants who vote on
policy. The governors, the New York Fed President and a rotating
group of four of the regional presidents serve as voting members
of the committee. This year, the Cleveland, Richmond, Atlanta
and San Francisco Fed Presidents hold a vote.

Lacker Dissent

The FOMC members voted 11-1 in favor of their action at the
September meeting, with only Richmond Fed President Jeffrey
Lacker dissenting. Lacker has dissented from every FOMC
statement this year.

The S&P 500 has climbed more than 15 percent this year and
remains near a four-year closing high of 1,465.77 reached the
day after the Fed announced the new bond buying Sept. 13.

The index has more than doubled since reaching a 12-year
low of 676.53 on March 9, 2009. Next year the index will
probably exceed its record of 1,565.15 reached in October 2007,
according to strategists’ estimates compiled by Bloomberg News.

While reducing borrowing costs, the Fed hasn’t made steady
progress toward meeting its mandate to achieve full employment.
The jobless rate has stayed above 8 percent since February 2009.

‘Modest Pace’

“I don’t see anything that’s going to get us out of this
modest pace and give us the oomph we need,” said Josh Feinman,
the New York-based global chief economist for DB Advisors, the
Deutsche Bank AG asset management unit that oversees $220
billion and a former senior economist at the Fed’s board of
governors.

“The economy is just stuck in low gear, even though the
recovery is more than three years old,” he said. “It’s very
unsatisfying and it’s very sluggish. The data have been mixed.”

The economy in the U.S. grew less than previously forecast
in the second quarter, reflecting slower gains in consumer
spending. Gross domestic product rose by 1.3 percent from April
through June after expanding at a 2 percent rate in the first
quarter and 4.1 percent in the fourth quarter.